The Rube Goldberg Budget Machine

JAN. 14, 2011

By WAYNE LUSVARDI

Governor Jerry Brown’s newly released state budget can be analogized to one of those Rube Goldberg cartoon machines.

While Brown’s proposed state budget is a long overdue step in the right direction toward reducing deficits and devolving taxes to local control, it’s held together by a bunch of chewing gum, rubber bands, and other improvised devices that make it look like one of those Rube Goldberg cartoons of an over-engineered machine that performs a very simple task in an overly complex way. If any one part of the contraption fails the whole thing collapses. There is no redundancy or safety mechanisms built into the machine.

The newly released analysis of the Governor’s budget by the Legislative Analyst’s Office reports a $25.4 billion deficit over the next 18 months, which indicates the deficit has actually shrunk from $20 billion to $16.9 billion for the next fiscal year. But there are all those accrued prior year’s deficits that have been rolled into the long-term debt, so whether it’s $25.4 billion or $16.9 billion is a moot point. California has to backfill itself out of a hole it has been digging for years.

Government budget numbers are only as good as the assumptions they are based on and the type of political culture of budgeting on which it is based.  Most importantly, because of the multitude of speculative assumptions and devices in Brown’s budget, uncertainty has increased. This may affect bond markets and business investment decisions as well as whether school district superintendents believe they will get the monies budgeted given the governor’s apparent shell game with mandated public school spending under Prop 98.

Some of the budget assumptions contained in Brown’s budget include:

1. Brown hopes to win an appeal being heard by the U.S. Supreme Court in the case of Maxwell-Jolly v. California Pharmacists Association that would cut California’s share of Medi-Cal matching reimbursements by $9.5 million this year and $709 million for the coming fiscal year.  Last year, California lost this same appeal heard by the liberal 9th Circuit Federal Court of Appeal.  It is unlikely the Supreme Court will even schedule the case for review.  This would puncture an $804 million hole in Brown’s budget that only has about a billion dollar cushion and even that is based on highly speculative assumptions.

2.  Brown premises his budget on voter approval in June 2011 of a ballot initiative to extend $5.9 billion in taxes from four temporary tax increases adopted in 2009 (sales, income, vehicle, tobacco) and dedicating two of these taxes back to local government.

3. Passage of a ballot initiative to change Proposition 10, euphemistically called “The Children and Families First Act” (aka cigarette tax) to allow a continuation of increased tobacco taxes.

4. Anticipates $84 million in additional revenue from the Federal Small Business Jobs and Credit Act program enacted in September 2010.

5. The budget anticipates saving $1.1 million on the state’s high-speed rail project from ambiguous “interagency” agreements between the California Department of General Services and the U.S. Department of Justice. Apparently, the Federal government is going to pick up some of the state’s administrative overhead costs using the high-speed rail project as a funding conduit.

6. Assumes a $782 million drop in estate tax revenues due to federal tax changes enacted by the Pelosi-Reid Congress. Additionally, $400 million in decreased state revenue is projected as a result of taxpayers delaying taking capital gains and dividend income due to the above-mentioned tax changes.

7.  Loss of $400 million due to Prop 22 prohibiting the state from borrowing or raiding highway fund accounts funded with gasoline taxes.

8.  By suspending the operation of redevelopment agencies Brown hopes to pay off existing redevelopment agency debts and use the balance of their surplus revenues to offset $840 million in Medi-Cal costs and $860 million in trial court operating costs for a total of $1.7 billion. But the LAO says redevelopment debt costs may be understated by $1 billion and thus “the Legislature may not be able to use $1.7 billion of these revenues for state programs and make $1.1 billion in pass–through payments to local governments.”

9. Of course, not all cities have redevelopment agencies. So distribution to local schools would be uneven and there is no legal provision to return certain responsibilities to local schools.

Additionally, Brown’s recommended changes to the funds allocated to public schools under Prop 98 appear to be a shell game.  According to the LAO, Brown’s budget would backfill $2.167 billion from budget cuts in previous years but defer $2.067 billion in K-12 revenue limit payments for the upcoming year.  The LAO report comes right out and states that it doesn’t believe that $128 million of Prop 98 savings are achievable.

10.  The governor also assumes a $74 million savings from the sunsetting of the Special Disabilities Adjustment special education program. The LAO believes this could violate the federal maintenance-of-effort requirement and would have to be continued in one form or another to keep federal matching funds.

Past budgets, not political ideology or the relaxation of supermajority vote requirements for taxes under Prop 25, is the best predictor of future budgets. But the past few years California has been running budget deficits. It will apparently be a long climb out of California’s budget hole.

Despite the image of Gov. Brown’s budget as “austere” and “revolutionary” for proposing to return responsibilities back to local governments, it is so full of speculative assumptions that it has not lessened the uncertainty of whether the state is headed toward future insolvency or not, especially when the tsunami of public pension fund obligations start hitting local governments around 2012 to 2014.

Who knows if the marbles of projected revenue or expenditures put into the slot of California’s Rube Goldberg-like budgeting machine will roll out the other end come the finish of the 2011-12 fiscal year?

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